Australian housing finance declines 1.2% in July

The value of Australian housing finance fell by 1.2% in July ($24.2bn), driven by a 1.9% month-on-month decline in lending to owner-occupiers, the investor segment broadly flat (-0.1%m/m). The backdrop of the RBA's rate hiking cycle saw commitments fall 33.1% from the peak in January 2022 to the trough in February 2023; however, commitments are subsequently up 5.8% to July, with housing prices up around 5% nationwide to August, as rapid population growth has brought supply-demand dynamics to the forefront of the price cycle. Refinancing elevated to a new cycle peak ($21.5bn), up 5.4%m/m. 

Note: The ABS has temporarily suspended the first home buyer components from the series. 

July's 1.2% decline was steeper than markets anticipated (-0.5%) and came on the back of a 1.6% fall in June. Data from CoreLogic this morning reported national housing prices are now up 4.9% from their floor in February, with this upturn driving commitments up by 5.8%, despite the falls of the past couple of months. 

Owner-occupier lending was 1.9% lower in July, with weakness evident across the various loan types. Home building sentiment is weak, with this reflected in the value of construction-related lending falling by 4%m/m ($2.4bn) as loan volumes plunged by 9.7% (3,950) to be in line with their previous low in 2008. Lending to upgraders softened by 0.4%m/m ($12.1bn), a fall of 14.5% over the past year, with loan volumes down 11%yr.   

Lending to the investor segment eased 0.1% in July ($8.6bn), but commitments are up 11.6% from the February low. Queensland has been the major driver, with investor lending surging 31% since February. 

Total refinancing lifted 5.4% on the back of rises in both major segments: owner-occupiers 4.9% and investors 6.5%. This elevated refinancing to a new record high at $21.5bn, up 21% since the start of the RBA's rate hiking cycle in May 2022.

Preview: Australian Q2 GDP

Australia's National accounts for the June quarter are due to be published today at 11:30am (AEST). Growth in the Australian economy has slowed over the past year as the effects of falling real incomes and rising interest rates have weighed on household consumption. Expectations are for modest growth of around 0.4% in the June quarter. 

A recap: Australian economic growth slowed sharply in the March quarter...

Real GDP slowed to 0.2% in the March quarter. Excluding quarters that were impacted by Covid lockdowns, this was the weakest quarterly growth rate since the December quarter of 2018. Year-ended growth eased to 2.3%, underpinned by post-pandemic population growth on reopened borders, with GDP per capita up 0.3% through the year. 

Output growth continued to be exceeded by hours worked (7.1%Y/Y), describing productivity weakness. Weak growth in per capita terms and declining productivity pose challenges for the nation's policymakers, the latter currently putting upward pressure on unit labour costs, a key consideration for the RBA in its assessment of the inflation outlook.    

... as household consumption continued to moderate 

A weakening international economic backdrop and domestic headwinds from cost-of-living pressures and rising interest rates have contributed to slower growth in Australia. Reflecting this, household consumption was soft in Q1 (0.2%q/q) and has added little to output growth over the past couple of quarters. Residential construction activity (-1.2%q/q) has also been weighed by higher interest rates. 

Exports advanced further in the March quarter and have contributed substantially to economic growth over the past year. Reopened borders have facilitated a strong recovery in domestic tourism as well as in the education sector. Business investment has been another positive, defying the broader economic slowdown and tighter financing conditions.  

June quarter overview: Headwinds to economic growth persisted

Incoming data have been consistent with Australian economic growth remaining subdued in the June quarter. A range of crosscurrents continued to influence household consumption. Inflation declined further in the quarter after peaking at around 8% in late 2022, but concerns over elevated services prices prompted the RBA to hike rates at the May and June meetings, lifting the cash rate to 4.1%.  

Falling inflation has eased cost-of-living pressures slightly; however, household budgets remain pressured by declining real incomes, keeping consumer sentiment stuck at very weak levels. Inflation continued to outpace wages growth (3.6%Y/Y), though a boost from larger-than-usual increases to award rates and the national minimum wage announced by the Fair Work Commission will start flowing through in the September quarter. Some targeted cost-of-living support measures included in the May budget are also on the way. These measures stem from a windfall in federal government revenues from elevated commodity prices and strong labour market conditions.        

The pace of population growth is having broad effects across the economy. Population growth is boosting demand, in turn supporting employment and adding to the labour supply.   

Employment lifted at a solid pace in the quarter (103.2k), keeping the unemployment rate around 3.5% at half-century lows, alongside record-high levels of labour force participation. 

In the June quarter, retail sales volumes contracted by a further 0.5% to be 1.7% below their peak in Q3 2022. But much larger falls are evident in per capita terms - these volumes fell by 1.1% in Q2 and have contracted by 3.7% from the cycle high reached a year earlier - highlighting the support to consumption from population growth.     

Declining retail volumes have been driven by a weakening in discretionary-related areas of goods consumption; however, services consumption has remained more resilient. Strong labour market conditions, savings accumulated during the pandemic, and an upturn in housing prices are providing a supportive impulse to consumption.    

The rate of population growth continued to put pressure on the nation's housing stock. Despite a very substantial housing pipeline, supply remains tight as headwinds faced by homebuilders have held back completions. This has outweighed the effect of rising interest rates, reflected in capital housing prices rising by 6% since flooring in February, largely reversing their 9.7% peak-to-trough decline.

Summary of key dynamics in Q2

Household consumption — Pressures associated with falls in real incomes and rising interest rates continued a discretionary-driven slowdown in consumption growth. Non-food retail sales volumes contracted by 0.4% in the quarter, with the weakness mainly in household goods (-1.5%) and department stores (-1.4%). Services-related consumption appears to be remaining more resilient.    

Dwelling investment — Private sector home building came close to stalling over the first half of the year as rising interest rates and headwinds from capacity constraints and margin pressures weighed on activity. Alterations continued to unwind from their pandemic highs.   

Business investment — Capex advanced by 2.8% in the quarter, extending its upturn to a 10.8% rise through the year. Remains resilient to slowing economic growth and rising interest rates.   

Public demand — Boosted output by around 0.5ppt in the quarter. Driven largely by expanding investment in public infrastructure projects.     

Inventories — Saw a large drawdown in the June quarter (-1.9%) amid a backdrop of soft domestic demand. Expected to subtract around 1ppt from Q2 GDP.

Net exports — To add a substantial 0.8ppt to GDP growth in the quarter. Export volumes lifted 4.3% on the back of the ongoing recovery in the domestic services sector, outpacing a tepid rise in imports (0.7%). 

Australian Capex 2.8% in Q2; 2023/24 investment plans $157.8bn

A strong capital expenditure report for the June quarter confirms that Australian business investment continues to defy slower economic growth and rising interest rates. Meanwhile, year-ahead investment plans were upgraded sharply from the previous set of estimates, despite uncertainty clouding the economic outlook. 

Capex advanced by 2.8% in the June quarter - well above the 1% rise expected - to be up by 10.8% through the year. This follows a 3.7% lift in the March quarter, this outturn revised up from a 2.4% rise initially reported by the ABS. The topline details were a 3.5% expansion in buildings and structures and a 1.9% lift from equipment-related capex. 

Driving the uplift in capex has been the non-mining sector, which has seen a 14.2% rise come through over the past year; despite headwinds from slowing economic growth and tighter financing conditions, firms are investing - this partly a response to supply-demand imbalances that emerged through the pandemic. By contrast, mining sector capex is up 2.7% year-on-year, the earlier surge in commodity prices coming out of the pandemic having little effect by way of spurring investment. 

In the non-mining sector, buildings and structures lifted by a further 3.5% in the quarter to be up 15% through the year; equipment was 1.9% higher in the quarter and has risen by 6.4% in year-ended terms. 

Some of this upturn reflects a catch-up from the pandemic when planned spending was shelved; eased capacity constraints in the construction sector and in global supply chains (notably affecting new vehicles) have supported the upturn. In today's release, the ABS highlighted that many firms have likely brought forward capex spending ahead of tax incentives ceasing at the end of the 2022/23 financial year. Rising investment in renewable energy projects has also been a factor in the capex cycle moving counter to the broader economic climate. 

Forward-looking investment plans for the 2023/24 year remain resilient to current headwinds and uncertainty over the economic outlook, the latter cited as weighing on measures of business confidence. Estimate 3 of firms' investment plans for 2023/24 came in at $157.8bn (its highest since 2014/15), representing an upgrade of 14.5% on plans from three months ago, and 7.1% above the corresponding estimate for plans in 2022/23. This latest estimate trials total capex spending by firms in 2022/23 ($165.1bn) by 4.4% at this stage.

Looking further into the details, non-mining investment plans were lifted by 16.5% on estimate 2 to $110.6bn (tracking 8.4% higher on a year-to-year basis), with mining investment plans advancing 10.1% to $47.3bn (up 4% year-to-year). These estimates partly reflect inflationary effects; however, the upturn in the capex cycle shows there is an underlying imperative among firms to increase investment.   

Preview: CapEx Q2

Australia's capital expenditure report for the June quarter is due at 11:30am (AEST) this morning. The report provides an estimate of private sector business investment and a survey of firms' year-ahead investment plans. Capex has been resilient to rising interest rates and slower growth dynamics in the global economy and in Australia, and this is expected to have remained the case in the June quarter. 

A recap: Capex has seen an upturn... 

Momentum in capex has accelerated after earlier recovering from a period of shelved investment during the pandemic. Following a 3% rise in the December quarter, capex lifted by 2.4% in the March quarter. Over the past year, capex has expanded by 6.3% (in inflation-adjusted terms). 

... defying the economic slowdown ... 

Rising capex has defied tighter financing conditions stemming from the RBA's rate hiking cycle and slowing economic growth, both domestically and offshore. In Australia, real GDP has moderated to a 2.3% annual pace from 3.1% a year ago. In a backdrop of supply-demand imbalances, firms have lifted capex to respond to capacity constraints. Investment in new technology and renewable energy projects have also been key factors. In the March quarter, equipment spending was up 3.7% to be 5.8% higher through the year, while expenditure on buildings and structures lifted by 1.3%q/q and 6.8% in year-ended terms.        

The non-mining sector has led the upturn, rising by more than 8% over the past year. Buildings and structures (11.5%) have been the main impulse, with equipment also advancing (6.3%). Mining sector investment remains in its range from recent years.  

... and forward-looking investment plans have shown resilience 

An early projection of investment plans for the 2023/24 financial year came in at $137.6bn on estimate 2. This represented an upgrade of 6.4% on the initial estimate, which was also 5% above estimate 2 for 2022/23.   

Capex is expected to have lifted further in Q2 

The median estimate is for capex to have advanced by a further 1% in the June quarter, around a wide range from -2.4% on the low side to 2% top side. Today's report will also include an updated estimate of firms' investment plans for 2023/24 (est 3) and the final figure for 2022/23 capex. 

For estimate 3, the average upgrade over the history of the survey from estimate 2 has been 10-11%. The increase has been a touch stronger than this over the past couple of years. Using this as a guide, a 12% uplift points to a figure of around $154bn for estimate 3, assuming sentiment towards the capex outlook has not deteriorated in recent months. Actual capex for 2022/23 spending is likely to come in around $164bn, allowing for a 1% upgrade from estimate 6. 

Australian dwelling approvals slide further in July

Australian dwelling approvals slid by 8.1% month-on-month in July, remaining around decade lows and falling back near their lowest levels of the year. July's 8.1% fall far exceeded the median estimate for -1% and followed a 7.9% decline in June. Dwelling approvals are now 45.1% below their cycle high from March 2021, the decline reflecting the unwinding of Covid stimulus measures, rising interest rates, earlier falls in housing prices and headwinds in the construction sector.  

Approvals in the volatile higher-density segment fell by 19.9% to drive the headline decline, with house or detached approvals broadly flat (-0.1%). Compared to their 2021 peaks, unit approvals are down by 48.4% and house approvals are 43% lower.   

With the weakness in July approvals coming almost entirely in the higher-density segment, the disaggregated data is of interest. This indicates the weakness was mainly in the townhouse and high-rise segments.  

Approvals fell across most states in July. The major states of New South Wales and Victoria posted declines of 4.7% and 18.3% respectively, driven by the higher-density segment. According to the capital city data, higher-density approvals in Sydney declined by around 20% on the prior month and Melbourne approvals saw a 35.7% pullback. 

There has been little movement in approvals over recent months in Western Australia, South Australia and Tasmania; however, Queensland has seen a rebound, albeit approvals in the state weakened in July (-5.5%). A lift in unit approvals in Brisbane have been the key driver, with house approvals in the capital also showing a lift.    

Australian construction activity 0.4% in Q2

Australian construction output increased by a modest 0.4% in the June quarter, missing to the downside of expectations (1%) but coming after a large upward revision to work done in the March quarter (3.8% from 1.8%). Overall, these outturns report that construction activity lifted by 4.3% over the first half of 2023 and by 9.3% through the year to the June quarter. 

The increase in Q2 activity was driven by the engineering component (0.7%) as building work was subdued (0.2%), with residential weakness (0%) largely offsetting the momentum from non-residential activity (0.6%).    

It has been a mixed picture for activity across broad construction in Australaia over the past year. Increased public sector investment (11.7%) coming out of the pandemic has seen infrastruture spending ramp up, underpinning an acceleration in engineering activity (15.5%), with spillover effects for the private sector through involvement in these projects. 

Non-residential activity (6.7%) has picked up over the past year as firms have played catch up with projects earlier delayed by the pandemic and capacity constraints; investment in renewable energy projects has also been a key factor.  

By contrast, private sector residential construction (3.2%) has been more subdued. New home building lifted by 5.1% through the year, but activity came close to stalling in the first half of 2023 (0.2%), indicating capacity constraints are still a headwind. Rising insolvencies may be contributing to this, which have stemmed from margin pressures homebuilders have faced amid cost escalations and rising interest rates. Meanwhile, alterations have contracted by 7.2% over the past year, to now be 12% below their 2021 peak. After surging during the pandemic alongside stimulus measures from low interest rates and construction subsidies, alterations are normailising as builders complete more of their backlogged projects.

Australian CPI slows to 4.9% in July

Australian CPI inflation slowed to a 17-month low at 4.9% in July, firming expectations for the RBA to extend its hiking pause at next week's meeting. Australian inflation has fallen substantially from its 8.4% peak at the end of 2022 as global disinflationary impulses have gradually worked through to domestic prices, with today's report indicating this process has continued into the second half of the year. 

In a downside surprise relative to market expectations, 12-month headline CPI fell from 5.4% in June to 4.9% in July, below the 5.2% consensus figure. The various gauges of underlying inflation were also softer compared to the prior month. 

The disinflationary impulse is largely reflected in goods inflation falling from a peak of nearly 10% late last year to 4.4% in July. There was also some softening in services inflation (5.6%), but this will not convince the RBA of anything regarding a turn from elevated rates.  

Price falls for fruit and vegetables (-5.4%) and fuel (-7.6%) have been driving factors behind declining inflation. Compared to 12 months ago, inflationary pressures have eased materially across home building (5.9%), household gas (13.9%), travel (5.3%), and clothing and footwear (1.5%) to name a few key areas. On the flip side, rents have continued to advance (7.6%) and electricity prices are up 15.7% from 12 months ago, with government rebates keeping an even larger increase of 19.2% at bay. 

Encouragingly, the recent momentum points to further declines in inflation, though fuel prices have risen sharply in recent weeks. Headline CPI on both a 3-month (2%) and 6-month annualised basis (3.8%) in July was running well below the 4.9% 12-month rate. 

Australian retail sales rebound 0.5% in July

Australian retail sales rebounded more strongly than anticipated in July, with discretionary spending boosted by the FIFA Women's World Cup and school holidays. Following a 0.8% fall in June, headline sales advanced 0.5% in July, an outturn near the top end of the range of forecasts and well above the expected 0.2% rise. Discretionary sales (0.9%) outpaced the headline increase as spending rebounded across cafes and restaurants (1.3%), department stores (3.6%), and clothing and footwear (2%). 

The July report continued the volatile profile seen in retail sales over recent months, reflecting a combination of seasonal effects and shifts in spending patterns. April sales fell (-0.1%) amid Easter holidays; end of financial year sales brought forward spending into May (0.8%) before reversing in June (-0.8%); a rebound has subsequently come through in July (0.5%), attributed by the ABS to the FIFA Women's World Cup and school holidays.   

Smoothing out the volatility, the momentum in retail sales has been soft, consistent with the broader slowdown in household consumption. Monthly retail sales have averaged a 0.2% increase over the past 3 months, indicating sales are tracking at an annualised pace of around 2%. These figures also include the effect of retail price inflation. The June report showed retail prices lifted by a solid 0.9% in Q2, resulting in a 0.5% decline in underlying sales volumes.  

Overall, retail sales have come under pressure as households have cut back discretionary spending amid falling real incomes and rising incomes; however, the July rebound suggests there is still a level of resilience evident in spending. 

Macro (Re)view (18/8) | Headwinds intensify

Heavy declines across global equities reflected the ongoing weakness in sentiment amid concerns over China's economy and a reappraisal of the interest rate trajectory in the US. These influences contributed to further strength in the US dollar, supported also by Treasury yields continuing to claim at the long end of the curve. 

Economic concerns in China continued to weigh on broad assets as a range of interventions from the authorities fell short of improving sentiment. Of note, the PBoC injected the equivalent of around US$55bn of one-year funding via its bank lending facility and lowered the interest rate on these loans by 15bps to 2.5%. Further signs of faltering growth were evident as retail sales (2.5%Y/Y) and industrial production (3.7%Y/Y) came in weak relative to expectations in July, and the unemployment rate ticked up from 5.2% to 5.3%. The downturn in the housing market appears to have intensified, increasing default risks for some major developers. Plunging sales have contributed to property investment contracting by 8.5% over January-July from a year earlier; home prices meanwhile fell by 0.2% in July, their largest monthly fall this year.

Events through the week in Australia added support for the RBA to extend its tightening pause. The minutes from the RBA's August meeting revealed that the Board elected to hold as it saw there was "a credible path back to the inflation target with the cash rate staying at its present level". The Board remains data dependent and has left the door open to tightening further; however, underwhelming wages growth and a weak labour market report points to its pause being maintained. The Wage Price Index lifted 0.8% in the June quarter (vs 0.9% expected) as the pace eased from 3.7% to 3.6% year-ended (reviewed here). July's Labour Force Survey was weak across the key details (reviewed here), summarised by the unemployment rate lifting from 3.5% to 3.7% on an unexpected 14.6k decline in employment (vs +15k forecast). While seasonal volatility looks to be behind the weakness in the July report, it supports the RBA's stance of remaining on the sidelines to monitor developments. 

Strong upside surprises in US retail sales in July (0.7%m/m vs 0.4% exp) - underpinned by momentum in the control group (1%m/m vs 0.5%) - reaffirmed the resilience of household spending, indicating the economy remains on track for a soft landing. However, it also prompted the market to reassess its pricing for 2024 rate cuts, based on the view that the Fed will need to keep rates at a restrictive level for longer. 

Taking a step back, the minutes of the Fed's meeting late last month detailed its shift to a data-dependent outlook for policy. Noting that the announced 25bps hike in July to 5.25-5.5% lifted rates further into a restrictive range, the FOMC was mindful that risks to achieving both sides of its mandate for 2% inflation and full employment had increased. In that respect, future decisions would need to carefully weigh up the risk of an "inadvertent overtightening of policy against the cost of an insufficient tightening". 

Europe remains quiet amid its summer recess but in the UK hotter than anticipated price and wage data sealed expectations for further tightening from the BoE. The SONIA curve now prices a further 75bps of hikes to a peak rate of 6% by the end of the year. Headline CPI inflation was down sharply from 7.9% in June to 6.8% in July (vs 6.7%); however, the core rate was unchanged at 6.9% (vs 6.8%). Falling energy prices and goods disinflation have driven headline inflation down from 10.1% a year ago. By contrast, services prices continued to firm (7.4%) and this is underpinning elevated core inflation. Despite a rise in the UK unemployment rate from 4.0% to 4.2% over the 3 months to June, wage pressures lifted. Earnings growth accelerated between April-June to be 8.2% higher over the year, the pace slightly softer at 7.8% excluding bonuses; both measures were expected at 7.4%.